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Jeff Cooper: The Most Important Metric For Success In Speculation


The Most Important Metric For Success In Speculation

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There are a lot of metrics you can look at in lining up a profitable edge.

However, in my experience, the singular most important factor is defined by one word: behavior.

For example, not all trendline breakouts or signal bars (reversal or continuation bars) on the time frame under consideration are created equal. It is the subsequent behavior that is crucial to observe.

As I always say to traders who ask me what the key to trading is: "Speculation is observation, pure and experiential, thinking isn't necessary and often gets us in trouble."

Within the context of any uptrend (or downtrend), there are many false signals and shakeouts that flush players out before an item continues its trend. This is part and parcel of market DNA. If this were not the case, everyone would be happily riding the trend to the bank.

What constitutes a genuine change in trend? Of course, that's the $64,000 question, isn't it?

Just as shakeouts in a persistent trend don't leave unequivocal calling cards, so to genuine changes in trend (on whatever timeframe) don't ring a bell at the top and bottom.

Both depend on behavior... price behavior.

Price is the final arbiter.

Divergences in breadth, volume, and any array of indicators and oscillators can last much longer than presumed.

Follow-through is key. After a breakout or a reversal, it is follow-through that tells the tale of the tape.

Cycles and time/price square-outs offer great clues to shape expectations, but it is the subsequent behavior that counts.

Sometimes cycles will invert.

Additionally, while all important tops and bottoms are price or time/price square-outs, not all time/price square-outs are major tops or bottoms.

There WILL be many square-outs throughout an uptrend or a downtrend on the way to ultimate culmination.

These will occur on the primary and secondary trends.

For example, as flagged in this space following the November 3 top, a break of 2071 which ties to 90 degrees down in price should see a downdraft to the next 90 degree decrement lower at 2024.

The SPX broke 2071 on 11/12 falling to 2022 two days later.

The next session, 11/16, saw the SPX make a nominal new low of 2019 before staging a strong reversal leaving a large range outside up day -- mirroring the large range outside up day on October 2.

So, the behavior 180 degrees down from the November 3 high at 2024 was conspicuously constructive, suggesting a test of the last swing high. Many leading stocks offered substantial opportunities since the November 16 reversal.

Names which rallied from the 11/16 signal reversal day in the SPX include NFLX, which rallied from 102 to 126,  AAPL, which rallied from 111 to 120, and VRSN, which ran from 81 to 91.

Notable is that all three of the above names left signal reversal bars on 11/16 in tandem with the SPX:

VRSN broke out on 11/16 following a 3-week consolidation.

NFLX left an Expansion Pivot/180 buy signal on 11/16, a reversal pattern from its 50 day line.

AAPL left bullish looking Train Tracks from the level of its last upside pivot on October 20.

So the behavior of leading stocks in tandem with a square-out in the SPX left a solid risk-to-reward buy setup.

What if I told you that there was also a time/price square-out on November 16?

Specifically, 2019 aligns with November 16th on the Square of 9 Wheel.

The big reversal on November 16 underpinned that time/price harmonic. The behavior was bullish -- at least for another push toward the highs. Here at the end of the month and early December is straight across and opposite 2100.

The behavior as to whether this level rejects the market again or the SPX breaks out is exemplified by the next few days being opposite 2100 on the Wheel.

So once again the key 2100 level is squarely in the crosshairs.

This is the level the SPX has flirted with all year. Every foray above 2100 has been turned back.

Although many signs of a major top have begun to accumulate, I can't help but wonder if these won't be more bricks in the wall of worry causing an ultimate blow-off if an authoritative breach of the 2134 high plays out.

I can't help but be reminded of  the long sideways move in 1929 prior to a 3 month blow-off and subsequent crash.
Is it possible that August represented the flushout allowing such a blow-off with the vast majority of money mangers caught in a fear of missing out posture going into/at the new year?

If so the Square of 9 implies potential to 2320 SPX.

After the long historic 6 month trading range from February this year, volatility came out of hibernation in August.

In a higher volatility environment, it follows that larger than normal upside and downside risk are on the table.


As offered above, follow through is key. There has been no downside follow through since the rebound from the August crash.
Going into year end the SPX  has carved out a test of the August plunge. Now there has been a test of the 2100 highs. Which will prevail?

The SPX topped on 5/20. It set a crash low around 90 degrees/days later on August 24. Here we are 180 degrees out from the May high and 90 degrees out from the August low.

Looks like a juncture recognition to me.


An hourly SPY shows that while a potential hourly Cup & Handle underpins a short term bullish view, at the same time, the SPY shows it may be in the process of completing a little 5 wave move off the November 16 low. This ties to the 2100 opposition setting up over the next few days on the Square of 9 Wheel.

Form Reading


Twitter: @JeffCooperLive

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